Systemic Uncertainty, Meet Fragility

August 30, 2017

That's the problem with fragility: everything looks fine on the surface until a crisis applies
pressure. Then the whole rickety contraption collapses in a heap..

Life is inherently uncertain, but systems that were once considered certainties have increasingly
become uncertain. Social Security is one example; recent polls reflect widespread doubts among
Millennials and Gen-Xers that there will be any Social Security benefits left for them by the time
they reach retirement age.

This doubt is fact-based; as the number of retirees swells, as Medicare costs soar ever higher
and the number of full-time jobs paying into Social Security/ Medicare stagnates, these
pay-as-you-go programs break down; Social Security is already paying out billions more than it collects
from employers and employees.

Uncertainty is one thing, fragility is another. The socio-economic systems we rely on are also
becoming increasingly fragile and prone to failure, for an entirely different set of reasons than those
driving uncertainty.

Changing fundamentals drive uncertainty. The nation's demographics and stagnant wages for the
bottom 95% are extremely unfavorable for pay-as-you-go programs like Social Security and Medicare;
their future is uncertain because the inputs and outputs are changing.

Fragility is a function of systems being thinned by cronyism, self-serving insiders, fraud,
lack of transparency, lack of competition, monopolies, profiteering and a decline of quality.
Systems that become too costly due to the above dynamics are hollowed out as everyone seeks some way
to reduce the costs. Redundancies are stripped out, staff is slashed to the bone, senior managers
with the most experience are pushed out to lower payroll costs, quality control is whacked, and
inferior inputs are presented as equal to the higher quality inputs that they replace.

When these weakened systems are under pressure or face a crisis, they crumble. Shoddy
materials fail, inexperienced managers make hasty, ill-informed decisions, the barebones staff is
overwhelmed, equipment that wasn't properly maintained to save money breaks down, and so on.

We're assured by financial authorities and the media that our banking system is now monstrously
resilient and robust, and it is impervious to financial crisis. You're kidding, right?
So when all the subprime auto loans go bust, and all the overleveraged commercial real estate
loans go bust, and all the developing-world debt in U.S. dollars goes into default, and all the
consumer debt issued to marginal borrowers goes bust, the hundreds of billions in losses are all
going to be absorbed, no problem.

This is fragility writ large. You can bet the entire financial sector is making the same
faulty, fragility-creating assumptions as a means of maximizing profits: only one auto loan in
a hundred will go into default, near-zero commercial real estate loans will blow up, every
dollar-denominated loan in the developing world will be paid in full, blah blah blah.

In other words,
if we assume FantasyLand perfection of marginal borrowers--that once a global recession guts their
opportunities to refinance and the income needed to service their loans, they will still magically
make all payments in full and on time--the financial system is resilient.

Beneath the reassurances, the system is increasingly fragile because all the resilience has
been stripped out of it to maximize profits in the current quarter. And as for the financial
authorities--who believes the financial sector is serving the interests of the bottom 99.5%?
Based on what evidence? Who believes the mainstream media is reporting the deteriorating fundamentals
and the increasing fragility of our society's core systems?

All we need is a few overlapping crises to reveal the structural fragility and
lack of trust/certainty in our core systems. Profiteering, cronyism, self-serving insiders,
a decline in quality, gaming the system, fraud, opacity, propaganda,
and the erosion of competence all seem like good clean fun when the weather
is calm and the sun in shining. But the true nature of our systemic failure will only be revealed
when multiple storms arise and the system is pushed to the limit.

That's the problem with fragility: everything looks fine on the surface until a crisis applies
pressure. Then the whole rickety contraption collapses in a heap.